Preparing for Military Retirement? 5 Financial Steps to Take

Planning for military retirement requires more than just knowing your service end date—it means taking proactive, tailored financial steps that account for the unique elements of military compensation and benefits. As a military service member or veteran, you benefit from tax-free allowances, specialized retirement plans, and other perks that, if optimized, can significantly improve your post-retirement financial security. Yet, many service members overlook critical steps that could maximize these advantages. This article outlines five actionable, often-overlooked financial steps that you should take before retiring from the military. By following these strategies, you can ensure a smoother transition, secure your financial future, and enjoy the benefits you’ve earned without compromising your military obligations.

Table of Contents

• Introduction: The Unique Financial Landscape of Military Retirement

• Step 1: Audit Your Military Financial Profile

• Step 2: Maximize Your Retirement Savings with a Multi-Account Strategy

• Step 3: Optimize Your Benefits – Beyond the Basics

• Step 4: Plan for Post-Retirement Income and Hidden Expenses

• Step 5: Leverage Professional Guidance and Military-Specific Financial Education

• Conclusion & Next Steps

Introduction: The Unique Financial Landscape of Military Retirement

Military compensation is unique. Beyond your base pay, you receive tax-free allowances like the Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS), special pays for deployments and hazardous duties, and an array of non-cash benefits such as TRICARE healthcare, discounted commissary shopping, and VA benefits. All these elements combine to create a compensation package that can be far more advantageous than a conventional civilian salary.

Yet, while these benefits provide a strong financial foundation, many service members overlook essential steps needed to maximize their long-term financial security. Whether it’s ensuring that your retirement savings are fully optimized, that you understand and utilize your unique benefits, or that you plan effectively for post-retirement expenses, strategic preparation is key. In this article, we break down five financial steps that are specifically tailored to the military context—steps that are often overlooked but can make a significant difference in your retirement outcomes.

Step 1: "Audit" Your Current Military Financial Profile

Before you can plan for retirement, you must have a complete and accurate picture of your current financial status. This goes beyond merely looking at your base pay; it involves understanding every component of your military compensation and how it integrates into your overall financial picture.

Key Components to Review:

• Base Pay and Special Pays: Review your Leave & Earnings Statement (LES) to verify your base pay, bonuses, and special pays such as deployment or hazardous duty pay. Many service members forget to account for these additional earnings when planning their retirement budgets.

• Tax-Free Allowances: Ensure that you fully understand the value of tax-free allowances like BAH and BAS. These allowances significantly reduce your current cost of living, but their true impact is often underappreciated. The loss of these allowances must be considered when preparing to retire.

• Non-Cash Benefits: Document benefits such as TRICARE (healthcare), discounted shopping at exchanges and commissaries, and travel perks. Quantify these benefits by estimating how much you save compared to civilian alternatives. Any benefits that carry over into retirement can be used to reduce your cost of living in retirement.

• Debt and Liabilities: Evaluate any outstanding debts, including loans or credit card balances. Knowing your liabilities is essential for creating a robust retirement plan.

Actionable Steps:

1. Gather Documentation: Collect your LES, bank statements, and any records of special pays or allowances.

2. Create a Detailed Budget: List all sources of income and expenses, including non-cash benefits. Use budgeting apps like Mint or YNAB for precision. Having a full understanding of your pre-retirement budget will help you better plan for the adjustments that will come with retirement.

3. Calculate Your Net Worth: Subtract your liabilities from your assets. This snapshot will help you identify areas where you can improve your financial health before retirement.

4. Review Regularly: Make this audit an annual or semi-annual process to stay updated on any changes in your financial status.

Tip: Develop a personalized financial dashboard that tracks both your cash flow and the implicit value of your non-cash benefits. This integrated approach ensures that you are aware of all the resources available to you.

Step 2: Maximize Your Retirement Savings with a Multi-Account Strategy

Military service members have access to several powerful retirement savings vehicles and using them in concert can greatly enhance your retirement security. Beyond the Thrift Savings Plan (TSP), you should also consider leveraging Individual Retirement Accounts (IRAs) and other investment options.

Optimize Your Thrift Savings Plan (TSP)

The TSP is one of the most valuable benefits for military personnel, offering low-cost, tax-advantaged retirement savings.

• Contribute Early and Consistently: Start contributing as soon as possible. Even small, regular contributions can compound over time.

• Match Considerations: Although military personnel might not always receive an employer match depending on the retirement system you have (BRS v. LRS), maximizing your contributions is critical given the TSP’s low fees and tax benefits.

• Asset Allocation: Diversify your TSP investments across the various funds (G, F, C, S, I Funds, and Lifecycle Funds) to manage risk effectively.

Leverage Individual Retirement Accounts (IRAs)

For additional flexibility and potentially more diverse investment choices, consider opening an IRA.

• Traditional vs. Roth IRA: Choose between the immediate tax deduction of a Traditional IRA and the tax-free withdrawals of a Roth IRA. Your decision should be based on your current and projected future tax situations.

• Contribution Limits: Remember that for 2025, you can contribute up to $6,500 if you're under 50, or $7,500 if you're 50 or older, including catch-up contributions.

• Backdoor Roth IRA: If your income exceeds the Roth IRA limits, explore the backdoor Roth IRA strategy to still benefit from tax-free growth.

Actionable Steps:

1. Automate Contributions: Set up automatic monthly contributions to your TSP and IRA accounts to ensure consistent saving.

2. Review and Rebalance: Regularly review your asset allocation in these accounts to ensure they align with your long-term goals.

3. Consult Financial Tools: Use retirement calculators and asset allocation tools provided by your financial institution to model different scenarios and optimize your investment mix.

Tip: Schedule an annual review of your retirement savings strategy, considering both TSP and IRA contributions, to ensure you're maximizing the tax benefits and compound growth potential available to you.

Step 3: Optimize Your Benefits – Beyond the Basics

Military retirement is not just about saving money—it’s also about making the most of the benefits that come with military service. Many service members overlook the true value of their non-cash benefits and additional perks.

Review and Convert Life Insurance

• VGLI Conversion: Consider converting your Servicemembers’ Group Life Insurance (SGLI) to Veterans’ Group Life Insurance (VGLI) when leaving active duty. You will have one year and 120 days after leaving service to enroll without needing a medical exam.

• Evaluate Coverage Needs: Assess your current life insurance needs and adjust your coverage accordingly to provide financial security for your family.

Optimize Healthcare Benefits

• TRICARE: Take full advantage of TRICARE for comprehensive, low-cost healthcare. Post-retirement, consider supplemental health insurance to cover gaps that TRICARE may not fully address.

• Health Savings: Even if you’re covered by TRICARE, budgeting for out-of-pocket expenses is crucial, especially as healthcare costs can rise with age. Go to all of your medical checkups and follow up appointments while you are still in the military to take advantage of your current health care benefits.

Leverage Other Military Perks

• Discounted Shopping: Utilize on-post exchanges and commissaries, which offer tax-free and discounted prices on everyday items. These savings can add up significantly over time.

• Travel Discounts: Service members often receive exclusive travel discounts on flights, hotels, and rental cars. If these extend to retirees or veterans, factor these savings into your overall budget.

• VA Benefits: Don’t overlook benefits available through the Department of Veterans Affairs, including home loans, education benefits, and additional healthcare resources. Consider these benefits in your retirement budget.

Actionable Steps:

1. Assess Your Coverage: Review your current life insurance, healthcare, and other benefits. Determine if any changes or conversions (like VGLI) will be necessary at retirement.

2. Quantify Savings: Estimate the financial impact of non-cash benefits, such as TRICARE, discounted shopping, and travel perks, to understand how they reduce your overall expenses. Determine how these will change once you are retired.

3. Plan for Post-Retirement Needs: Ensure that your benefits continue to meet your needs after retirement by considering supplemental insurance or additional financial resources.

Tip: Create a benefits checklist that outlines all the perks you currently receive, along with their estimated financial value. Review this checklist annually to ensure you’re maximizing the benefits available to you before retirement. Assess how these benefits will change, and their impact to you, once you retire.

Step 4: Plan for Post-Retirement Income and Hidden Expenses

While military pensions provide a foundation, a comprehensive retirement plan must also account for post-retirement income and expenses that are often overlooked.

Understand Your Military Pension

• Pension Calculations: Your military pension is based on your base pay and years of service. Familiarize yourself with the formula used to determine your pension and any potential adjustments or cost-of-living increases (COLA).

• Supplemental Income: Consider how additional retirement savings, such as those from your TSP and IRAs, will complement your pension.

Anticipate Healthcare and Living Expenses

• Healthcare Costs: Even with TRICARE, healthcare costs in retirement can increase. Plan for potential long-term care or supplemental insurance needs.

• Cost of Living Adjustments: Factor in changes in living expenses after retirement. Some costs may decrease, while others—like healthcare and leisure—could increase.

• Hidden Expenses: Consider expenses such as taxes on retirement income (for Traditional IRA withdrawals) and maintenance costs on any assets you hold.

Develop a Withdrawal Strategy

• Tax Efficiency: Create a strategy that minimizes taxes in retirement. This might involve managing withdrawals from Traditional IRAs (subject to RMDs) and Roth IRAs (tax-free).

• Required Minimum Distributions (RMDs): Understand when RMDs begin and how they affect your taxable income.

Tip: Use retirement planning calculators to project your post-retirement income and expenses. Develop a withdrawal strategy that takes into account your pension, retirement accounts, and potential tax implications.

Step 5: Leverage Professional Guidance and Military-Specific Financial Education

The complexities of military finances and retirement planning can be daunting. Leveraging professional guidance and continuous education is key to making informed decisions.

Consult a Military-Savvy Financial Advisor

• Expert Guidance: Look for a flat fee advisor who specializes in military and veteran finances. They can help you navigate the unique aspects of your compensation, benefits, and retirement planning.

• Tailored Strategy: A military-savvy advisor will help tailor a comprehensive plan that integrates your TSP, IRAs, insurance, and other benefits with your long-term financial goals.

Utilize Military Financial Education Resources

• Workshops and Seminars: Many military installations and veteran organizations offer free or low-cost financial education workshops focused on retirement planning, tax strategy, and investment management.

• Online Resources: Access military-specific financial websites and forums to stay informed about changes in regulations and best practices.

Set Clear, Measurable Goals

• Define Your Objectives: Clearly outline both your short-term needs and long-term aspirations. Document these goals and use them as a benchmark to measure your progress.

• Regular Reviews: Revisit your financial plan regularly to adjust for changes in your income, expenses, and retirement benefits.

Tip: Participate in military financial education programs to continuously update your knowledge and ensure your strategy remains relevant.

Conclusion & Next Steps

Preparing for military retirement is a multifaceted process that goes beyond simply knowing your years of service. It involves a thorough evaluation of your current financial situation, maximizing your retirement savings, optimizing your unique military benefits, planning for post-retirement income and expenses, and leveraging professional guidance tailored to the military context.

Key Takeaways:

• Audit Your Financial Profile: Understand every element of your military compensation, including base pay, allowances, and non-cash benefits, to get a complete picture of your financial health.

• Maximize Retirement Savings: Leverage the TSP and IRAs to build a diversified, tax-advantaged portfolio. Automate contributions to benefit from dollar-cost averaging.

• Optimize Your Benefits: Review and update your life insurance, healthcare, and other military-specific benefits to reduce your future expenses.

• Plan for Post-Retirement Needs: Develop a detailed plan that covers your military pension, additional retirement savings, healthcare costs, and hidden expenses.

• Seek Professional Guidance: Utilize military-savvy, flat fee financial advisors and continuous education to navigate the complexities of retirement planning.

Next Steps:

1. Conduct a Comprehensive Financial Audit: Gather your LES, bank statements, and any records of allowances or special pays. Create a detailed budget that includes both cash and non-cash benefits.

2. Increase Your Retirement Contributions: Max out your contributions to the TSP and IRAs. Set up automatic transfers to ensure consistency and review your investment allocations to align with your retirement goals.

3. Review and Optimize Your Benefits: Evaluate your VGLI, TRICARE, and other benefits. Consider converting SGLI to VGLI promptly at retirement and review your healthcare and insurance coverage to plan for retirement.

4. Develop a Post-Retirement Income Plan: Use online retirement calculators to model your future income. Create a withdrawal strategy that minimizes tax liabilities and accounts for RMDs in the future.

5. Consult with a Military Financial Advisor: Schedule an appointment with a flat fee professional who specializes in military finances to fine-tune your retirement strategy. Take advantage of military-specific financial workshops and educational resources.

6. Maintain Detailed Records and Regularly Review Your Plan: Keep meticulous records of all financial transactions and benefits. Set quarterly or annual reviews to adjust your strategy as your circumstances evolve.